The stock market regulator, the Bangladesh Securities and Exchange Commission (BSEC) published on December 21, 2017 new corporate governance guidelines soliciting public opinion, as required under the law. The draft corporate guidelines are vastly improved over the previous ones that are in place till now. The new ones contain detailed outlines about the composition of the management boards of the listed companies, albeit, allowing some differences for different types of the companies. More important in this respect is that the guidelines says, at least 1/5 of the members of the board shall have to be independent directors whose shareholdings in the company are not compulsory, and also, at least, a woman member shall be on the board. It also directed that, at least one-tenth of the board members shall have to be between the ages of 25 and 40, which we believe, if complied, will infuse vigour and dynamism in the company.
The draft guidelines state that the Commission will review from time to time the percentage of shareholding required by each director separately and by all the sponsoring directors together in the paid-up capital of the company. The draft guidelines also focus on which work would be performed by whom like the chief executive officer (CEO) and the chief financial officer (CFO) in the company. And it also says the positions of the Company Secretary, Chief Financial Officer (CFO), Head of Internal Audit and Compliance (HIAAC) and Head of Administration & Communication Technology (HACT) shall be filled up by separate persons.
As per the guidelines, the responsibility of reporting and certifying to the board the financial positions and those of authenticating of transactions of the company shall be vested with the CEO and CFO and certification shall have to be disclosed in the annual report of the company. The draft guidelines also provide for the mechanism for constitution and composition of various committees, such as, audit committee, executive committee and risk management committee in the company, and also of the functions to be performed by the committees. With regard to earnings of the company and distribution of the same, the draft guidelines make things clearer than they were before. It says, if a company wants to offer stock dividend to the shareholders, it must explain why it wants it instead of cash payment and what it will do with the retained earnings in case of such offering.
As per the draft guidelines, if a company distributes less than the earning per share as cash dividend, it shall have to explain why it is distributing less and what it will do with the retained or undistributed income. If the published guidelines are finally adopted by the BSEC, we hope, the evading companies with regard to distribution of incomes among the shareholders will come under scrutiny. And also, the offering of stock dividend will not be that easy. Unfortunately, the freedom of offering of stock dividend was found to be misused in Bangladesh's stock market by the listed companies. They were found to be offering stock dividends off and on even when companies did not have any expansion plan.
There are some loopholes in the guidelines which may be exploited by some companies to deprive the minority shareholders. These loopholes are: the guidelines did not say anything about remuneration and perks of the top personnel in the management of the companies. Some companies, especially multinationals ones, may show inflated figures in the expenditure items just on these accounts in order to show less income in the companies so that they are required to pay less tax to the government. If they are allowed to show the expenditures on salaries and wages as lump-sum, then there will remain some scope for exploiting the companies by offering more than admissible amounts as salaries and perks to the top management. We suggest, the salaries and other perks of CEOs, CFOs and HIACs be shown separately in the annual reports.
Also, as the corporate income tax in some other countries had been reduced drastically, there will be a tendency of siphoning off money out of the country by the listed multinationals under many headings like that of management fee, licence fee, royalty, etc. It should thus be necessary that the listed multinational companies disclose how much money they are taking out of the country under the above headings. Having said these, we welcome the published draft corporate guidelines and we hope that the same will be adopted by the BSEC after receiving more suggestions from relevant quarters.
Finally, the BSEC should see what more can be done to protect the interest of the minority shareholders. If the interests of the minority shareholders are protected, that will save the interest of the market itself.
The writer is Professor of Economics at the University of Dhaka.